Anti-Greenwashing SFDR Rules Take Effect in Europe

Investors in Europe will soon see important changes in the way their asset managers provide sustainability-related information on their products and updated sustainability policies. This is the result of requirements emanating from the European Union’s (EU) Sustainable Finance Disclosure Regulation (SFDR).

As background, in recent years, the demand for environmental, social and corporate governance (ESG) products from investors has grown quite rapidly with no signs of slowing down. However, the significant growth in investor demand and subsequent response from asset managers have created a crowded environment, which makes it harder for investors to assess ESG credentials of funds and the asset managers who create those products.

The regulation will require investment firms managing money in the EU to state if they are reviewing the environmental and social aspects of their investments. In particular, they are being asked to state they are considering the adverse sustainability impacts of their investment decisions.

In addition to disclosing information at the firm level, investment firms will also be required to disclose information on a product level about how their financial products are working to achieve desired sustainability outcomes. Products may be categorized as Article 6, 8 or 9:

Article 6: Integrate sustainability risks into advice or portfolio management investment decisions.

Article 8: Products which actively promote environmental or social characteristics.

Article 9: Products which have sustainable investment as their objective.

ClearBridge welcomes these standards as a way to enable asset managers to become more connected with clients, continue channeling capital toward a more sustainable economy and foster transparency and long-term thinking such as has driven ClearBridge’s approach for over three decades. We appreciate the efforts of the European Commission to further clarify and define the different approaches to ESG investing for clients throughout Europe. We expect the new system to help identify the level to which investment managers incorporate ESG into their investment process.

At ClearBridge, we have been meeting the majority of these requirements for many years through our emphasis on transparency and authenticity in our ESG integration. The majority of ClearBridge assets affected by the requirements will be categorized under Article 8 (products which actively promote environmental or social characteristics), as they integrate ESG considerations more robustly and with more of a focus on impact than Article 6, which merely considers sustainability risks, and they have the goal of long-term capital growth as their ultimate objective, unlike Article 9.

We view the SFDR requirements as a confirmation of ClearBridge’s approach to ESG integration and active equity ownership and look forward to the growth of sustainability investing they will enable.

22 | Partnering for Impact Partnering for Impact

Public equity ownership can be a powerful tool to influence companies and drive positive change. Engagements play an important role in this. Engagements are investment meetings between ClearBridge portfolio managers and research analysts and target company representatives – CEOs, CFOs and other firm decision makers – in which we share our philosophy and expectations on relevant fundamental and ESG topics, inquire about a company’s ESG-related goals and activities and set meaningful objectives for the future. As a firm, ClearBridge conducts over 1,000 company meetings every year.

We take a partnership approach toward driving change within corporations, focusing on the impact we can have during our conversations with leadership over long periods of time. Our high-conviction, concentrated approach to portfolio construction, coupled with our large asset base and ESG expertise, puts us in

Partnering for Impact | 23 01

a unique position. Impact can start small: asking the right questions, whether about gender equality, energy efficiency, better board governance or disclosure, can result in positive changes in the mindset and eventually the operations of public companies.

As long-term investors who also happen to be among the largest shareholders of many companies we own, we can get a seat at management’s table and emphasize material issues that are of concern to ourselves and our clients.